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Flash Market Update February 25, 2020

Flash Market Update February 25, 2020

February 25, 2020
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At 401(k) Engineers, it is very important to us that you are well informed about what’s happening in the markets. Here are a few of the key topics of conversation that we feel deserve the most attention this month. If you have any questions or would like to continue the conversation, let us know, and we appreciate the opportunity.

Overview:

The Coronavirus outbreak continues to hit the headlines, and fears have grown over the weekend with a concerning surge in cases across Italy and South Korea. For investors, the outbreak has sparked some disturbing imagery across news outlets and social media around grocery stores in Milan with nearly bare shelves, and local fears rise. Further, in the week prior, Apple issued a revenue warning related to the outbreak and concerns over supply chains and labor shortages, and Bloomberg is estimating that the Chinese economy is operating at roughly half of its regular capacity.

Monday, the S&P fell 3.35% on the day, but still up roughly 0.4% since news of the outbreak started. We saw all-time highs in February and are down 4.7% off those highs, mainly due to Monday’s movement. The market is quickly pricing in concerns over the lack of containment over the weekend and could soon snap back on positive news regarding containment or if/when a vaccine or other treatment has been found and put into production.

In previous updates, we have cited that modern outbreaks, very real and poignant human tragedies, have typically had minor impacts on capital markets. We looked at several major outbreaks over the last few decades and failed to find any long-term impact (and in some cases, even short-term impacts) in equity markets and the ability for companies and economies to recover and return to growth.

That said, each of these cases is unique in terms of the severity, location, transmission, and other aspects of a given outbreak. We are not epidemiology experts and certainly can’t predict what may happen next, but feel it is important to set a level where we are today and provide context and detail into what we are seeing.

Why is it important?

As travel warnings and restrictions are put into place, and more areas of quarantine are declared, there can be a genuine impact on supply chains and output in our world of intricate and expansive supply chains. We have seen glimmers of this, and these events may put a damper in Q1 growth as well as introduce a bought of uncertainty and volatility into markets. We have already seen some increased volatility expectations as well as declining interest rates in an initial flight to safety.

Looking Ahead

In short, we don’t know what lies ahead. We know governments are rallying resources to address this issue as well as coordinate responses as best they can. There have been some small-scale travel warnings and restrictions put in place, but these may very well be temporary. The situation may get worse before it gets better, but the data set, as it stands today, does not support the idea of widespread disruptions or long-term impacts of the outbreak.

Bottom Line

We will continue to monitor the situation closely and assess the underlying data and be proactive in our communication to you. We believe staying unemotional during these times is the best course of action and avoiding knee-jerk reactions and continuing to focus on the data are the best tools we have available in situations like these.

As always, please reach out to us with any needs or questions.